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Exam 17: Security Valuation and Selection

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Question 51

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MTB Surfboards has a P/E of 20.The discount rate for this firm is 30 percent.They had earnings of $2,000,000 and 100,000 shares of common stock outstanding.What should be the current price of the stock?

A) $120.00
B) $60.00
C) $600.00
D) $400.00
E) $200.00

F) A) and C)
G) D) and E)

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Question 52

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The Dow Theory states that as long as the Dow Jones Industrial Average and the Dow Jones Transportation Average move in the same direction, the market will continue its current trend.

A) True
B) False

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Question 53

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The economic activity in the United States generally is measured by the gross domestic product (GDP).

Industries that include durable goods manufacturers generally are more sensitive to interest rate changes than industries that include staple goods firms.

According to the economic value added (EVA) method, a firm should be considered attractive only if it can generate sufficient income to pay for its existing capital.

Industries that are comprised of companies that tend to be directly related to business cycles are generally referred to as cyclical industries.

Technical analysis is used to determine when the economy is going to expand or contract in the future.

Technical analysts essentially believe "history repeats itself" because investors behave in a predictable manner when faced with situations they have faced in the past.

The industry life cycle follows various stages of growth with respect to the product of competitive conditions within the industry.

Pet Rock Quarries, Inc.is a publicly traded company with 200,000 shares of common stock outstanding.The stock currently sells for $50.00 a share.They had net income of $4,000,000.What is the company's P/E ratio?

Technical analysis is the examination of the supply/demand relationships for securities to determine trends in price movements of stocks or financial markets.

If an investor wishes to better diversify her investment portfolio, which consists of the common stocks of many of the firms that are in the Dow Jones Industrial Average, she probably should invest in some companies that are in those industries that are classified as countercyclical, or defensive.

Economic measures that tend to mirror, or move concurrent with, business cycles are called coincident indicators.

Industries that tend to be directly related to business cycles such that they perform best during expansions and worst during contractions are called ____.

Industries generally go through life cycles similar to the human life cycle⎯in the first years of an industry's life growth is substantial, yet operations are somewhat unstable, while in its later years, the industry has attained greater stability, but growth slows and perhaps even declines.

Titanium World Inc., which is a firm that makes specialized golf clubs, plans to pay a dividend of $2 per share at the end of this year; the following year's dividend is expected to be $3 per share; the dividend the year after is expected to be $5; and, after that point, dividends should increase at a constant rate of 10 percent each year forever.The appropriate discount rate for Titanium World is 15 percent.What is the per share value of Titanium World's stock?

Using the following financial data, determine the maximum dividends per share that can be paid to stockholders before the firm's value would be threatened.Base your answer on the economic value added model.

Hurricane Shutters Inc.paid a dividend of $1.30 yesterday.The next dividend will be in one year and is expected to be $1.50.After that, dividends are expected to grow at a constant 15 percent forever.The discount rate for Hurricane Shutters Inc.is 25 percent.What should be the market price of the stock?

Technical analysts probably would agree that fundamental analysts can find the intrinsic value of a firm, but, by the time fundamentalists finish their analysis, it is too late to take advantage of the result.

Fundamental analysis is used to try to find the intrinsic value of a firm, which actually is the "true", or economic, value.